Tuesday, August 14, 2007

China's Gini Coefficient and Market Economy

This is my translation of an article by Xue Cong on www.cesnew.com titled “Is Market Economy A Sure Cause for Wealth Disparity?” (dated August 14, 2007):-

"Recently Mo Yu Xi’s 'the wealthy need to be protected' theory has stirred up heated debate in society. He said 'The difference between market economy and planned economy is that the former is centered on equality of individual (right) while the latter focuses on equality of the economy (income). In the former case, as one individual differs from another in that each has his own level of capability and share of luck, this inevitably leads to unequal distribution of income. In the latter case, equality in the economy is achieved by suppressing the more talented individuals, at the expense of individual right equality.'

Our generation and Mo’s generation have suffered immensely under a planned economy. If we were given a choice, we would not hesitate to opt for market economy.

Before we make such a choice, maybe we should follow this logic and gather some data to verify whether such is really the case: that those countries with more effective market economies are the ones that have more serious income disparity, while those with planned economies are the ones that have less serious disparity. A few days ago, the Financial Times reported a study by the Asian Development Bank, which reveals that China and Nepal are countries that have the widest income gap in Asia, while Japan, South Korea and Taiwan have much more equal income distribution. In our urge to learn about market economy, should we follow Nepal’s example, or that of Japan, South Korea and Taiwan?

Let us now take a look at the global situation. I have found some GINI coefficient ranking statistics compiled by the United Nation. In these statistics, the higher the grading means the more unequal the society. China’s coefficient is 0.447 and is among the thirty countries that have the widest wealth gap. I could not find any developed country whose rich-poor gap is worse than China’s. For example, Denmark, Japan, Sweden and Norway rank No. 1, 2, 3 and 5 as the most equal societies and their respective GINI coefficient are 0.247, 0.249, 0.25 and 0.258. Even the United States, who is well known for having great wealth inequality, has a coefficient of 0.408; Germany – 0.283, Britain – 0.36, and France – 0.327. Those economically advanced countries with ratings over 0.40 include only the U.S. and Singapore (0.425), but they are still lower than China’s figure. As for those countries whose rich-poor gap is worse than China’s, they are mostly the poorest countries like some African countries, Sri Lanka and Haiti, plus some developing countries whose economies are a notch better, like Brazil, Mexico, Argentina and Chile.

From those statistics we can come to the conclusion that a market economy, particularly a healthy market economy, will lead not to wealth disparity, but rather, to even distribution of wealth. Wide rich-poor gap is usually found in countries who do not have market economies, or whose market economies are defective (e.g. some African and Latin American countries).

The so-called 'equality' in our planned economy era was no more than self-indulgent wishful thinking. During that time, although inequality was not expressed in monetary terms, it exhibited itself through the urban-rural gulf, which was a creation of the planned economy. Now Mo Yu Xi suggests creating a separate GINI coefficient for each of the urban and the rural. It is tantamount to concealing the inequality created under our very own system. And then on the strength of such data to declare that our rich-poor gap is not that wide, and the important thing is to protect the rich! How could that be convincing?

I am not qualified to judge whether wealth inequality in China is at an alarming level. But not only has the Asian Development Bank’s study pointed out that China is one of the Asian countries with a noxious wealth gap, it has also warned that this trend will persist into the future. If things continue at the current pace, it will not be long before China catches up with some poor African countries in her GINI coefficient rating. And those countries hardly have any social stability, or political stability, let alone economic prosperity."

I agree with you that the analysis in the article is not perfect. But I think the author's main purpose is to refute Mo Yu Xi's (who is an economist) saying that the rich need to be protected, and to warn those in power that something needs to be done about the wealth disparity before it worsens.

I wonder if you could do me a little favour, I have recently started an online support group for mental illness patients, friends and families in Hong Kong. I have started it because I believe there is no such resources in Hong Kong. I started it alone without any sponsorship, but in time, I hope it will grow and reach out to more people. I'm nowtrying to promote the website to more people, however, I think at this point the traditional media will ignore me. If you could kindly blog about it in your site, or refer me to other bloggers, I will highly appreciated.

The site is http://hkmentalhealthsupport.org/

You can learn more about me at http://people.bu.edu/benita, mind the site is a bit out dated.

Indeed, context is all important. Poorer countries moving towards more market oriented economies are doing so without the safety nets that more developed economies have. So rapidly increasing inequalities are likely - and dangerous. I'm just glad to see that somebody else blogs about Gini.

(To Saxyscuba)Hi there. Thanks for your kind words. Your website and comments can now be seen by readers of this blog (although not of a great number as this is a new blog). Still, I hope this would help a little. Good luck with your work!

(To Kifimbocheza)Hi there. Thanks for your comment. I agree that a slightly higher GINI figure for China is understandable. But I am baffled by Hong Kong's figure of 0.533, with her well developed and advanced economy and high GDP per capita. Does it say that market economy is not working well there?

The Gini Coefficient is one of the many means to evaluate the income disparity of an economy and it could vary tremendously under different methods of calculations.

A high Gini Coefficient doesn't necessarily indicate that an economy is doing worse in the sense that the rich are becoming richer and the poor poorer. In the case of HK, government statistics suggest that the percentage of low income group keeps decreasing over the years. Only that the rate of decreasing among low-income group cannot catch up with that of the high-income group. Several reasons that could account for such a dissonance include dissonance include the huge immigration population from China, which are mainly unskilled labor, and also the disparity between the marginal benefits of knowlege-based and unskilled industries.

I am college student, taking some courses in economics. Hope this will help, I like your blog a lot !! hehe !

What I was questioning was in fact whether the paradox of having a high GDP per capita and a high GINI coefficient at the same time means that the system of so-called "free market economy" is not working efficiently in HK. This question has something to do with my long-held belief that Hong Kong in reality DOES NOT have a free market economy because of the highly rigged land system, where the government collude with the property conglomerates in maintaining a high land price policy, which is a major (though indirect) cause for the income disparity. I tried to explain this in my book "Land and the Ruling Class in Hong Kong".